Could blue states end up experiencing adverse selection?
This recently occurred to me. Before I explain why I would be asking the question, let’s clarify what adverse selection is.
In insurance, you want to avoid adverse selection – having the highest-risk insureds select your company for their insurance coverage.
Insurance companies rate the risk of applicants and then act in a number of ways. They can issue a rider excluding coverage for the particular condition that poses the increased risk, include a waiting period during which claims related to the particular risk will not be covered or refuse to provide coverage.
They also might charge the insured significantly more in premiums to account for the increased risk, while at the same time attempting to increase the size of the risk pool so that there are plenty of low-risk insureds paying in premiums to cover the cost of insurance benefits paid out to those with covered losses.
Before the Affordable Care Act, people were regularly turned down for insurance based on pre-existing conditions, issued a rider or charged significantly higher premiums.
After the ACA became law, insurance companies could no longer exclude coverage based on pre-existing conditions and could not charge higher premiums to account for higher risk. It has been no surprise that premiums have increased for everyone to account for losses incurred in covering these high-risk patients.
As premiums increase, it is those who are less economically advantaged and the lowest-risk individuals who then often decide that the benefit of the insurance is not worth the cost. If and when these lower-risk individuals drop out of the risk pools, the risks and costs for insurers increase and in turn, premiums further increase, causing further loss of lower risk individuals.
Insurance coverage can be mandated to keep low-risk individuals in the risk pool. As an example, many states require auto coverage so that everyone is covered and insurance costs are kept down.
The ACA required coverage, but the penalties of not having coverage were set so low that lower-risk individuals could still conclude that the benefit of insurance was not worth the cost. Most recently, Congress took action to eliminate the penalty for not having the required ACA-compliant coverage (the requirement known as the individual mandate) beginning in 2019.
Republicans have been unsuccessful in their attempts to repeal and replace the ACA, but have taken many steps to weaken it. Besides repealing the tax penalty associated with the individual mandate, many Republican states elected not to expand their Medicaid programs, and President Trump has issued executive orders to promote the use of short-term, limited-duration plans and association health plans, which are not subject to the requirements of the ACA.
These lower-cost/lower-benefit plans, embraced by Republican-controlled states, will be able to base premiums on pre-existing conditions and do not have to provide all the coverage mandated under the ACA. They are expected to attract healthier individuals and deter older, sicker patients, due to the fact that participants will pay higher premiums and have less coverage under these plans.
Democrat-controlled states have embraced Medicaid expansion and are adopting measures to counter the Trump administration’s efforts to weaken the ACA by enacting or proposing legislation to create their own individual mandates and by increasing regulation of short-term, limited-duration health plans and association plans to make them less attractive to the young and healthy.
All of which led me to thinking that with an emerging divide between blue states and red states, where blue states are taking steps that will increase coverage and decrease the costs for older, sicker individuals and where red states are taking steps that allow younger and healthier individuals to purchase lower-cost/lower-benefit plans without a penalty for having plans that are noncompliant with ACA requirements but increase the premiums for older and sicker individuals, might we end up over time with younger, healthier individuals earning above the Medicaid income levels opting to live in red states and older, sicker individuals and those poorer individuals qualifying for Medicaid opting to live in blue states?
If so, this has implications for state Medicaid budgets, state health-care costs and the make-up of state workforces. Time will tell.
Many legislators have stated that the states should be the laboratories of health-care reform. That has a lot of appeal, but on the other hand poses risks, given the deep philosophical divide between blue states and red states. History tells us that control of government is likely to shift to the Democrats in the next two to six years, and it appears that Democrats in control would be very likely to try to enact a national scheme that would increase coverage and mitigate the differences between states.
This whipsaw of party control and associated changes to health-care law makes it very difficult for leaders of health care systems to have stability in their planning. That is why I believe that we must be focused on a redesign of the health-care delivery system that benefits everyone, no matter who is in control in Washington. I believe the transformation will be led by progressive health systems like St. Luke’s, and is the journey we are on to provide value-based care.
David C. Pate, M.D., J.D., is president and CEO of St. Luke's Health System, based in Boise, Idaho. Dr. Pate joined the System in 2009. He received his medical degree from Baylor College of Medicine in Houston and his law degree from the University of Houston Law Center.